Bitumen bubble bursts as heavy oil differential narrows

CALGARY HERALD ^ | JULY 5, 2013 | DAVE COOPER

[thackney]

The so-called "bitumen bubble," which was used to justify provincial cuts this spring, has burst, as Alberta bitumen passed the $85 per barrel mark this week.

That's almost double what Alberta was getting for its raw bitumen in January, when prices were about $45 per barrel. And since all prices are based on U.S. dollars, and the loonie has dropped in value compared to its American counterpart, Thursday's price of $85.50 looks even sweeter.

The most important international benchmark, West Texas Intermediate (WTI) oil at Cushing, Okla., was trading for $101 per barrel. And Western Canada Select (WCS), the benchmark blend that includes bitumen, was $91 per barrel at the Hardisty terminal, according to trading data from Flint Hills Resources.

The resulting differential of just $10 per barrel is considered excellent for western Canadian producers, and an improvement over the $16.50 average differential last month. In January, it was as high as $40.

The bitumen bubble was cited by the Alberta government as a contributing factor in a shortfall of about $3.6 billion in non-renewable resource revenue in 2012. The deficit for last year was officially pegged at $2.8 billion last month, an improvement on the $4 billion forecast in March. Rising bitumen prices, on which the province bases its oilsands royalties, could also help the bottom line.

"But as far as revisions to our forecasts, you'll need to wait until our first quarter update

at the end of August," said Finance ministry spokesman Chris Bourdeau.

The closeness between WTI and global Brent benchmark crude, which exceeded $105 on Thursday, marks a return to 2010, said Greg Priddy, director of global oil for the Eurasia Group, a leading political risk research and consulting firm.

"While a narrowing of the spread has long been expected, it is not clear that it can continue back closer to parity or a slight premium for WTI, which was the norm until mid-2010," Priddy said.

The weakening of Brent and strengthening of WTI and Canadian oil is being watched in Europe, says Robert Johnston, director of energy and natural resources for Eurasia Group.

"We have a compelling story around weakening Brent and strengthening WTI that has led to the spread collapsing. Good news for anyone pricing WCS vs. WTI," he said in an email from London. "The larger story remains the eventual shift of the crude oil bottleneck from Cushing to the U.S. coasts."

Johnston said Canada's light oil must go east to avoid a glut in the Midwest and Gulf Coast. As U.S. light oil and Canadian heavy oil imports push out the current suppliers from Venezuela, Africa and the Middle East, American refineries will be depending on exports of petroleum products to Latin America as an outlet for their production.

But the risk there will be competition and a possible glut of oil - and lower prices - along the Gulf Coast. And that would push down the price for both WTI and Canadian oil.

Eurasia notes the recent higher WTI prices are due to major additions to pipeline capacity and the continued expansion of rail shipments that have moved oil from Cushing to the Gulf Coast.

[M Kehoe]

And if Keystone was built, it would tend to lower the prices at the pump, and promote self sufficiency.

Oh, forgot who is charge.

5.56mm

[M Kehoe]

in charge

Sheesh.

5.56mm

[Squawk 8888]

To all- please ping me to Canadian topics.

Canada Ping!

[SunkenCiv]

Thanks thackney.